Treasure Islands: Dirty Money, Tax Havens and the Men Who Stole Your Cash

by Nicholas Shaxson

  Her colleagues hailed from old European aristocratic circles. While Krall was perfectly good at her job and had close working relationships with top lawyers, asset managers, and so on, a gap remained. “They went to parties with royalty, with ambassadors,” she said. “I wasn’t in their circle.”

  At the time, laws in the Bahamas were being tightened a bit, following a feeble global crackdown, and she moved sideways in the bank to work as a “compliance officer.” These days, offshore bankers make a big show of their “Know Your Customer” rules, to keep out the bad money. Depositors may have to supply a certified copy of a passport, for example, and divulge where their money came from. Jurisdictions like the Bahamas and the Cayman Islands put these requirements into their statutes, and banks must comply; they employ compliance officers like Krall to enforce this.

  That, at least, is the theory.

  In her new job Krall began to learn of the many devious avenues around the rules. “You would ask for the source of funds—and they could tell you anything,” she replied. “You didn’t ask for documentation.” Another compliance officer Krall knew was expressly forbidden from seeing certain files. A loophole in Bahamas law let institutions waive due diligence checks on clients if they were referred from a financial institution in a jurisdiction where the legislation is supposed to be good. Once in a while a bank would uncover a money-laundering case to show it is enforcing the law: They were happy to do this, Krall said, provided it did not expose anyone the bank would not want to upset. Legal frameworks that distinguish between the criminal and the legitimate have eroded away offshore, replaced by networks of trust that distinguish between the well established and respectable, on the one hand, and the unknown and dispensable, on the other.

  Individuals with sums to launder or invest with minimal taxation want to know that they are dealing with people who can be trusted not to have moral qualms. If the bankers don’t know you, you will have to jump through many hoops; if you are a long-standing and trusted client, the rules fall away. These trust-based networks, deferential to the aristocracy of wealth and privilege and resistant to formal laws, are the ultimate source of comfort for the banks’ wealthy clients. The similarities with un-spoken Mafia codes of behavior are no coincidence at all.

  “These banks are competing with each other, but they also scratch each others’ backs,” Krall said. “The heads of these banks are part of a circle of friends and business associates, where the whole social circle revolves around it: a social structure intertwined with a business relationship. They will pass business between each other.”

  “The law says you must report suspicious activity to the Financial Intelligence Unit [FIU] or the police,” she continued. “But in a very small place, everyone knows everyone and their cousin. I couldn’t trust a report being handled confidentially or through proper channels. There is a huge chance that someone in the FIU or the police will be close to people in the bank where you work . . . and this could cause me harm for raising the issue.”

  Krall was supposed to check for suspicious movements through the accounts—of which there were plenty. She raised many red flags. Her managers “would say, ‘This was a commission’ [on a contract].” Were these bribes? Commissions on what?

  “I went back, and never got an answer.”

  One Swiss-based trust company that had a relationship with her bank displayed almost no information on their website, bar some photos of a nice fountain in Geneva. “The crap they brought to us was unbelievable—there is no way a responsible trustee should take this on. You would have no idea who the trust settlors were; what the assets were or where they came from. I objected strongly—but the bank took them on.”

  Over time her qualms grew, and she began to find herself in a very lonely place. “I couldn’t even tell my boyfriend. I was supposed to abide by bank secrecy,” she remembered. “It wasn’t easy for him, with someone walking through the door at the end of the day, pale, drained, and sick, with stuff going on he can never know about.” Other compliance officers whom she chatted with also felt their powerlessness. “There was a fear abroad,” she remembered. “You have this dilemma: the difficult news you will give to directors may not be appreciated. Most people want to do their job, protecting the bank and country from the taint, as well as doing their ethical, moral, and legal duty. You go into the job with that mind-set.”

  I chatted to Krall about my own recent experiences in the Cayman Islands: about what happened when I revealed to one of my first interviewees in the Caymans that I had links to an organization that had been critical of tax havens. That meeting ended in minutes. I had been referred to this interviewee by a mutual friend, and after our meeting my friend got emails stressing how “uncomfortable” she felt, and requesting promises on promises that I would never identify her.

  People I met in the Caymans almost always seemed to find it distasteful, or changed the subject, when I asked questions such as whether or not one might balance the prosperity of the fifty thousand–odd islanders against the interests of 350 million North Americans, 600 million Latin Americans, and the same number again in Africa. Even more surprising to me was that despite the confidence with which I hold my own views, I found myself feeling shy, almost ashamed, expressing them on the Cayman Islands, from the first day.

  Krall recognized this shifty feeling immediately. “When I was planning to leave the Bahamas friends were kindly introducing me to other private banking opportunities,” she said. “The thought of continuing in that profession made me feel disgusted to the point of being physically nauseous, yet here were my dear friends, working in exactly the same industry, being helpful. How could I say to them directly there was no way I could do that work anymore, while they were still in it?”

  “I felt that ‘unclean’ feeling from every direction: unclean for having done that kind of work and yet unclean with feeling as though I was being, somehow, not truly and openly honest with my friends.”

  Stephanie Padilla-Kaltenborn, an American mother of two and an old friend of mine who lived until recently in the Cayman Islands, recalled soon becoming aware of unspoken limits of curiosity and candor in the secrecy jurisdiction. “It’s a feeling when you live there that there’s something under the surface and I did not want to look,” she said. “I knew the answers would be more complicated than I could deal with. You cannot talk to people—it’s a strange invisible line you can’t cross. It’s a semi-chosen state of mind—a self-censorship.”

  Krall’s experiences, and her treatment, are echoed in the widely publicized case of Bradley Birkenfeld, the gregarious old Bostonian UBS director who recently helped the U.S. Internal Revenue Service dismantle a $20 billion UBS program to help wealthy U.S. residents evade taxes and forced Switzerland to accept a new, somewhat more transparent tax treaty with the United States. Birkenfeld described in court how UBS bankers would frequent events like the UBS Trophy yacht race off Rhode Island, the Art Basel contemporary art fair, classic car shows and concerts, and—his personal favorite—a ten-thousand-dollar-a-head evening with Elton John at the Waldorf Astoria in 2005, illegally soliciting client business. “I’d say, ‘Do you want to go to Wimbledon, have lunch and see the match?” Birkenfeld recalled.2 “‘Do you want to come to Oktoberfest and drink some beer and look at hot girls? Whatever you want to do.’ I would go to the Cannes Film Festival, the Venice Film Festival, the Bangkok Film Festival.” On one occasion, he smuggled diamonds into the United States in a toothpaste tube. His star client, Oleg Olenicoff, explained how impressive the Swiss bankers’ performance was while courting his tax-evading business. “It’s all very proper and precise,” Olenicoff recalled. “You feel you’re in the German Reichstag with all the generals there!”3

  While visiting the Caymans in 2009, I was chatting with a former senior Caymanian politician at his house when a thickset, dark-skinned Caymanian, probably in his forties, wearing a blue polo shirt, khaki shorts, and sunglasses, walked in and introduced himself as “The Devil.”
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  I still do not know his name, though my sober and well-connected host vouched firmly for him. The mystery stranger said he had serious credentials in international law enforcement so—this was all I could think of—I tested him by showing a photo on my phone that I’d recently taken of Robert Morgenthau, the Manhattan district attorney, a legend in the business. Not a sophisticated test, for sure, but my stranger passed it without hesitation.

  He said he had spent years probing some of the global sins that freewheel through the Cayman Islands and chatted about several cases, many of which I’d never heard of. One concerned Imad Mugniyah, whom I later discovered to be a senior Hezbollah official killed in Syria in 2008; another was about a Cayman company fingered in the transfer of missile technology to Iran (later I checked with the U.S. Office of Foreign Assets Control and discovered this was still a very live investigation). He touched on some Cayman operations of the international arms dealer Victor Bout that never reached the media. He spoke of Cayman hedge funds, mutual funds, and special purpose vehicles, and he described these sectors as being riddled with crime, though he declined to go into any real details. At this point, he supplied me with a health warning.

  “If we discuss this with you, you will end up like Salman Rushdie. There are things here not to be discussed. I mean it,” he said. “This is a wicked, vicious place.”

  He said he had become too interested in certain stones that would normally, and deliberately, have been left unturned—and this had made him an enemy of the establishment. This, he said, was why he called himself “The Devil”—for that was how they treated him now.

  “You have to have a deep soul,” he continued. “They carry out economic isolation—they destroy your credibility and your integrity. They will strip you of your dignity. We operate here under a code of silence—omertà. They will tell you this is not so.”

  “There is a cabal here…. These people in [the] firms get together—it is an informal thing—and say this guy is causing trouble. You will get hints: Be careful! from your boss. I got this.” Powerful Masonic and other networks are at play; the cabal does not include Caymanian politicians, he said, but added, “They will give the politicians a call and tell them what to do.” My host—the only dissident I encountered on the island—interjected, adding that this cabal was “spoken of in terms you’d speak of a ghost.”

  “The very difficult part of this,” The Devil continued, “is that a few people here—those people who have committed what the international community would consider unlawful acts—they get the CBEs, the OBEs [British royal decorations] . . . they sit on boards, they have high status, and they are looked on as statesmen.”

  He described another avenue around the legislation. Cayman boasts of its intrusive Know-Your-Customer laws, which are fairly strong—on paper. Yet it was just as Krall had found it in the Bahamas: The rules fall away if you are a trusted part of the network. “If I do not have a relationship [with an institution] they will want to know even my underwear size,” The Devil said. “But if you have an established relationship with a bank over time, the rules don’t apply to you. If you are established as a well-to-do person, your credibility isn’t questioned.” His words remind me of an internal memo at the Riggs Bank brought to light in 2004 by the U.S. Permanent Committee on Investigation. “Client is a private investment company domiciled in the Bahamas,” it said, “used as a vehicle to manage the investment needs of beneficial owner, now a retired professional who achieved much success in his career and accumulated wealth during his lifetime for retirement in an orderly way.” The “retired professional” was the Chilean torturer-in-chief and former dictator Augusto Pinochet.

  Beneath the Caymans’ standard official line that it is a “transparent, well- regulated and co-operative jurisdiction” lies a more fiendish reality.

  Later I recounted my “Devil” story and Krall’s tale to an accountant who had worked in the Caymans, who nodded fiercely when I mentioned the reference to Salman Rushdie. “Yes, yes, it’s serious,” he said. “It’s not naive to take these threats seriously. You will be the first to go to prison if something goes wrong.” He told me about several mysterious offshore deaths, including that of a Swiss banker, Frederick Bise, who was found dead in 2008 in the hatchback of a burning car in Grand Bay, on the Caymans, with blunt force injuries to his head.

  My interlocutor, a former hedge fund administrator, compliance officer, and chief accountant, described how he slowly grew to see what was going on.

  “I started feeling bad three or four years after I arrived,” he said. “We ran business through the accounts, which was kind of dubious: you’d get information here and there and put it together—but you could not ask questions. Even if you had indications, you could not speak up. I did speak up, and the result was that I got less information at meetings. Information was sort of prediscussed: I felt that a kind of show was going on.”

  He came under suspicion and was overloaded with work: twelve hundred hours of overtime in a year, with no compensation. “The CEO said, ‘This is part of your job.’”

  “We replaced 40 to 50 percent of our staff within two years: people who do not fit into the system for any reason are pushed out. Ask questions, and you can get fired, or given so much work [that] you [eventually] resign. It is not done obviously: they won’t call you into meetings and say, ‘Stop asking questions.’ These are highly intellectual, well-educated people: they have their own way of communicating. You learn to read between the lines. They will not say, ‘I am threatening you.’ They will say, ‘This person does not fit into the picture.’ I have been in the business for years, and I know what they mean.”

  Most people working offshore only see fragments of the big picture, so cannot understand what is going on. “For example, if there is a trust set up in the Caymans, and the securities portfolio is in Switzerland, you will get very little information in the Caymans: you won’t know the reason why things happen. The ones who commit the crimes—those people who set up the trust or the Special Purpose Vehicle—will often sit in New York or London. The employees in many cases are honest people, trying to do their best: it will be the lawyer, or the CEO, or the chief operating officer, who knows the truth.” Once you become part of senior management, then “you are part of the inner circle and things become much clearer. You are part of the plot. You know what the real products and services are, and why they are so expensive.”

  An old offshore saying encapsulates it: “Those who know don’t talk, and those who talk don’t know.”

  Other subtle checks on troublemakers abound. To stay in the Caymans, for example, you need a work permit. Any expatriate who causes trouble—whether a seconded police official, lawyer, regulator, or auditor—can have his or her work permit revoked by the “Cayman Protection Board,” which grants permits. Foreigners in the Caymans are made painfully aware of their vulnerability on this.

  “If you blow the whistle and stay on the island—and this is general in offshore centers—you don’t have whistle-blower protections at all. If you speak up in one place, the network works in a way that you will never get work again. It is suicide, physically and economically. There is no way you would find protection.” My interlocutor chopped the palm of one hand with the other for emphasis.

  “Have you seen the John Grisham film The Firm? It’s worse. It’s not only the lawyers—it’s the whole political environment.”

  Before visiting the Caymans in 2009, I had contacted island authorities to request interviews and told them I had done work for the Tax Justice Network (TJN), the expert-led organization that criticizes secrecy jurisdictions like Cayman. On arrival, the government spokesman Ted Bravakis said because of this there was “no willingness to engage.” A decision to shun me, he said, had been taken “at the highest levels of government.”

  Earlier, I had emailed a top official in the Cayman Islands regulatory apparatus, requesting an interview. He copied me into an email to local practitioners, criticizing effor
ts by his predecessor, Tim Ridley, to help me get interviews during my trip. “I do wish Tim would stop hawking this chap around as if to say he is doing us a favor,” the official wrote. “We are going to prepare a factual anodyne piece in writing but will decline any on the record interview.” I told him he may not have meant to copy me in on the mail. “Quite so,” he replied, then put his finger squarely on an important truth about such places. “I have no problem with you understanding how the world at large regards the comments of TJN,” he said. “I say so directly at every opportunity and meet with uniform agreement.”

  In the official’s “world at large”—the offshore environment—there is no opposition to the establishment consensus, it seems.

  There is, in fact, something generic about island life that encourages the group-think that the official describes. In his novel Snow Falling on Cedars, the writer David Guterson captures an essence of it. “An enemy on an island is an enemy forever. There is no blending into an anonymous background, no neighboring society to shift toward. Islanders were required, by the very nature of their landscape, to watch their step moment by moment.” The social and political inhibitions islanders feel, he continued, “are excellent and poor at the same time—excellent because it means most people take care, poor because it means an inbreeding of the spirit, too much held in, regret and silent brooding, a world whose inhabitants walk in trepidation, in fear of opening up.”

  In the island goldfish bowl, you cannot hide. This ease of sustaining an establishment consensus and suppressing troublemakers makes islands especially hospitable to offshore finance, reassuring international finance that they can be trusted not to allow democratic politics to interfere in the business of making money. In the British tax haven of Jersey, three local sayings encapsulate the constant social pressure: “Don’t hang your dirty linen out in public,” “Don’t rock the boat,” and “If you don’t like it, there’s always a boat in the morning.”